08KYIV2303, UKRAINE: RUSSIA DEMANDS UKRAINE PAY ITS GAS DEBT,

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C O N F I D E N T I A L KYIV 002303
SIPDIS
DEPT FOR EUR/UMB,
EEB/ESC/IEC FOR SGALLOGLY AND LWRIGHT
DOE FOR LEKIMOFF, CCALIENDO, RBOUDREAU
USDOC FOR 4231/ITA/OEENIS/NISD/CLUCYK
E.O. 12958: DECL: 11/24/2018
TAGS: EINVENRGEPETPINRPRELUP
SUBJECT: UKRAINE: RUSSIA DEMANDS UKRAINE PAY ITS GAS DEBT,
OR ELSE
REF: KYIV 2221
Classified By: Ambassador for reasons 1.4 (b) and (d)
¶1. (SBU) Summary. As annual gas negotiations between Ukraine
and Russia intensify, Russian President Medvedev weighed in
on Ukraine's gas debt in Ukrainian press reports, hinting at
gas cutoffs if Ukraine does not pay its debt by the end of
the year. Gazprom CEO Alexei Miller added an additional
threat, saying Ukraine could pay $400 per thousand cubic
meters (tcm) of gas or more in 2009 if it fails to pay its
outstanding debt. There is no shortage of views on Ukraine's
gas price for 2009, with most commentators assuming that
Ukraine will need to pay substantially more than the current
$179.5/tcm. To date, Gazprom and Naftohaz have not been able
to agree on the exact debt Ukraine owes and a mechanism for
repayment, which in turn is stalling progress on a gas price
agreement for 2009. Gazprom says Ukraine owes it $2.4
billion, while Prime Minister Tymoshenko denies that the debt
belongs to Ukraine. As the squabbling over the debt
continues, Ukraine has at stake coveted long-term contracts,
a gradual increase to market prices, and the removal of gas
intermediary RosUkrEnergo (RUE) from the current gas
arrangement. End summary.
Medvedev Threatens "Serious Steps"
----------------------------------
¶2. (SBU) The Ukrainian press reported that Russian President
Medvedev had told Ukraine it must pay its outstanding natural
gas debt of $2.4 billion immediately, and directed Gazprom
CEO Alexei Miller to employ all legal means to ensure Ukraine
follows through. Medvedev explained that either Ukraine
would freely pay its debt, or Russia would take "serious
steps" to collect the debt itself, without defining what
those steps might be. Later, Gazprom spokesperson Sergei
Kupriyanov explained in the press that if Ukraine did not pay
its debt and new contracts were not signed by January 1,
2009, Gazprom would be forced to suspend gas supplies to
Ukraine; yet, he was hopeful gas cutoffs could be avoided
through ongoing negotiations. He added that Gazprom was
preparing legal documents to take Ukraine to international
court over the gas debt if needed. On November 21, Ukrainian
President Yushchenko directed the government to resolve the
debt to Gazprom in 5 days. As of November 24, the debt issue
remains unresolved.
¶3. (SBU) Ukrainian Prime Minister Yuliya Tymoshenko disputed
the debt in the press, claiming the debt belongs to gas
intermediary RosUkrEnergo (RUE) and not to Ukraine.
Nevertheless, Tymoshenko remains hopeful all gas debt
misunderstandings will be resolved, gas contracts will be
signed by the end of the year, Ukraine will gradually move to
a market price for gas, and RUE will be removed from the gas
transport arrangement with Russia.
Miller Says Gas Price Can Reach $400/tcm
----------------------------------------
¶4. (SBU) Gazprom's CEO Alexei Miller was more specific than
Medvedev on the gas debt. Ukrainian media reported that
Miller estimated the debt to be more than $2.4 billion. He
said Putin and Tymoshenko had agreed via their October 2
Memorandum of Understanding that the outstanding debt would
be repaid immediately (reftel). He added that to date there
has been no movement from the Ukrainians to settle the debt,
and said Ukraine can expect a gas price above $400 per
thousand cubic meters (tcm) for 2009 if it failed to do so.
Others Offer their Views
------------------------
¶5. (C) As in the lead-up to gas negotiations in past years,
players on both the Ukrainian and Russian sides are offering
up what they think will be the price in 2009. Kostiantyn
Hryschenko, Ukraine's Ambassador to Russia, told the
Ambassador on November 20 that if Ukraine would pay off its
$2.4 billion debt, RUE would be eliminated from the bilateral
gas trade, and Ukraine would maintain its current price for
gas of $179.50/tcm. In October, Naftohaz and Gazprom
officials stated that Ukraine would most likely have to pay
$250-$300/tcm. Most Ukrainian energy experts doubt that
Ukraine will get any price lower than $250/tcm.
¶6. (SBU) Estimates have generally moved downward as the world
economic crisis has unfolded and oil prices continue their
free fall. Ukrainian officials have repeatedly told us that
they were hopeful that the 2009 gas price would be linked to
the spot market price for oil, since Russia ties gas prices
to Europe to the oil price. To our knowledge, such a linkage
is not a done deal. Russia's agreement to move to European
prices for Ukraine is contingent upon Ukraine's full
repayment of its gas debts. Nonetheless, the lack of linkage
may actually benefit Ukraine in the short term, as it may be
able to negotiate a 2009 price that is st
ill less than the
prices paid by western European countries next year, assuming
that it pays off the debts to Gazprom.
¶7. (SBU) Both sides are giving contradictory information
about the size of the debt. Naftohaz has claimed that the
debt is $1.3 billion, and not $2.4 billion as Gazprom
charged, but other press reports cite Naftohaz officials
admitting that Naftohaz might owe an additional $250 million
in late fees and $870 million for gas for October, putting
Naftohaz's debt closer to $2.42 billion. Sources at Gazprom
have suggested that Naftohaz settle the debt by waiving
transit fees on Gazprom gas shipments to western Europe, but
Naftohaz and Gazprom officials have not officially
acknowledged any such arrangement. Gazprom also has
well-publicized financial problems and falling gas prices
leave it also strapped for cash, making it unclear whether
Gazprom would accept anything besides cash at this time.
Comment
-------
¶8. (C) Medvedev's tough talk has many Ukrainians worried
about possibly high 2009 gas prices and possible gas cutoffs.
The Ukrainian press continues to report that the fragile
Ukrainian economy could not handle a gas price of $400/tcm.
Naftohaz's de-facto bankruptcy leaves it little room to
settle the debt without government intervention. It appears
that Tymoshenko agreed to pay off all outstanding debts in
order to secure a long-term contract, a gradual move to
European prices, and the removal of infamous gas intermediary
RUE. Ukraine remains in a weak bargaining position vis-a-vis
Russia, and its only real option is to pay the debt. End
comment.
TAYLOR

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